Price cuts: a drop in the ocean

Telkom’s February 24 announcement that it would be lowering the prices on its broadband digital subscriber line (DSL) offerings was music to consumers’ ears. Upon closer inspection, however, many were left disgruntled by the fact that these prices remain excessively high when compared with similar products offered by telecoms companies overseas.

Moneyweb approached telecoms analyst Dobek Pater of African Analysts in order to determine if South African consumers’ concerns are founded.

First off, some background. In the first nine months of 2004, DSL broadband attracted 24-m new subscribers across the globe, taking the total figure to 85-m. A mere 1% of these users are based in the Middle East and Africa and of that figure, according to Dobek, South Africa accounts for 5%. “The whole of Africa probably accounts for some 8 to 9% of that 1%. This is minute on a global scale,” says Pater.

Looking at broadband DSL in particular, there are 50,000 ADSL subscribers in SA, according to Telkom CEO Sizwe Nxasana. “In terms of penetration in the local market, the 50,000 ADSL lines represent just over 1% of the total lines rolled out,” says Pater (see chart below).

Telkom’s new and cheaper offerings are as follows: HomeDSL 192, a new product that enables continuous Internet access, comes in at R329 a month. As of March 1, prices will be lowered on BusinessDSL 512, which will retail at R699 (down from R800), and HomeDSL 512, which will now cost R599, down from R680. The price of its HomeDSL 384 offering will remain unchanged at R449 a month. Pater is of the opinion that Telkom has decided to lower its DSL prices and diversify its offering in response to the emerging competition in the market: “WBS, Sentech, the SNO in the future as well as the mobile operators are already beginning to offer wireless and/or mobile broadband services in the same price range,” he says.

Still, it’s not enough

Given consumers’ price sensitivity, the number of those opting to use broadband services will inevitably be a function of the cost at which the service is provided, and in South Africa, it looks as if this remains relatively prohibitive when compared to some products offered overseas. Pater provided Moneyweb with some comparisons, saying that although the benchmark is limited, Telkom’s prices appear quite high in contrast:

  • In the USA, SBC Southwestern Bell has a home-user DSL product that transfers 3000/486kbps (downstream and upstream respectively) that costs $40 (roughly R233) a month.
  • Similarly, SBC Pacific Bell offers a 1150/302 DSL at $30 (approximately R175) a month.
  • In the UK, a home user 512kbps broadband connection from British Telecom (BT) costs ₤18 (or R200) a month. For businesses, a 512kbps broadband connection from BT costs ₤22 (R244) a month.
  • TPSA in Poland provides home users with a 512kbps broadband connection for 121 zloty (around R236) a month, whereas the same service for businesses costs 255 zloty (about R497) a month.

Pater says that Telkom’s HomeDSL 384 product is priced “comparatively well vis-à-vis what the competition is currently offering, but the 512kbps service was priced too high when compared to the Sentech and WBS offering, which achieved download speeds in the region of 1megabyte per second (Mbps).”

Pater feels that Telkom could probably lower its prices further, but that there is a caveat in this as far as meeting shareholders’ expectation goes: “As a public company, one of its priorities is to maximise shareholder value and profits, and therefore it is unlikely to lower prices unless it gauges that such a move would offset potential loss of revenue through higher subscription rates.”

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Price cuts: a drop in the ocean